for mba students

1. Negotiable instrument
Act 1881
Negotiable instrument(amendment and miscellaneous provisions)act, 2002
By Ritu Rohilla

2. Overview of Management
Learning outcomes
• Introduction of Negotiable instrument act
• Amendment made in 2002
• Understand the meaning, nature of
negotiable instruments
• Type of instruments
• Explain the dishonor and discharge of
negotiable instruments

3. Overview of Management
INTRODUCTION TO NEGOTIABLE
INSTRUMENTS ACT, 1881
The Negotiable Instruments Act was
enacted, in India, in 1881. Prior to its enactment,
the provision of the English Negotiable
Instrument Act were applicable in India, and the
present Act is also based on the English Act with
certain modifications. It extends to the whole of
India except the State of Jammu and Kashmir.
The Act operates subject to the provisions of
Sections 31 and 32 of the Reserve Bank of India
Act, 1934. it is amended in 2002 and latter in
2015
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4. Overview of Management
NEGOTIABLE INSTRUMENT
The word negotiable means ‘transferable by
delivery’, and word instrument means ‘a written
document by which a right is created in favour of
some person. Thus, the term “negotiable instrument”
means “a written document transferable by delivery”.
According to Section 13 (1) of the
Negotiable Instruments Act, “A negotiable
instrument means a promissory note, bill of
exchange, or cheque payable either to order or to
bearer”. “A negotiable instrument may be made
payable to two or more payees jointly, or it may be
made payable in the alternative to one of two, or one
or some of several payees” [Section 13(2)].
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5. Overview of Management
FEATURES OF NEGOTIABLE
INSTRUMENTS
• Writing and Signature
• Money
• Freely Transferable
• Title of Holder Free from all Defects
• Notice
• Presumption
• Special Procedure
• Popularity
• Evidence
5

6. Overview of Management
TYPES OF NEGOTIABLE INSTRUMENTS
1. Negotiable instruments recognised by statute are :
1. Promissory notes
2. Bills of exchange
3. Cheques
2. Negotiable instruments recognised by usage or
custom are :
1. Hundis
2. Share warrants
3. Dividend warrants
4. Bankers draft
5. Circular notes
6. Bearer debentures
7. Debentures of Bombay Port Trust
8. Railway receipts
9. Delivery orders.

7. Overview of Management
PRESUMPTIONS AS TO NEGOTIABLE
INSTRUMENT
1. Consideration: It shall be presumed that every
negotiable instrument was made drawn,
accepted or endorsed for consideration.
2. Date: Where a negotiable instrument is dated,
the presumption is that it has been made or
drawn on such date, unless the contrary is
proved.
3. Time of acceptance: Unless the contrary is
proved, every accepted bill of exchange is
presumed to have been accepted within a
reasonable time after its issue and before its
maturity.

8. Overview of Management
4. Time of transfer: Unless the contrary is
presumed it shall be presumed that every
transfer of a negotiable instrument was made
before its maturity.
5. Order of endorsement: Until the contrary is
proved it shall be presumed that the
endorsements appearing upon a negotiable
instrument were made in the order in which
they appear thereon.
6. Stamp: Unless the contrary is proved, it shall
be presumed that a lost promissory note, bill of
exchange or cheque was duly stamped.

9. Overview of Management
7. Holder in due course: Until the contrary is
proved, it shall be presumed that the holder of
a negotiable instrument is the holder in due
course.
8. Proof of protest: Section 119 lays down that in
a suit upon an instrument which has been
dishonoured, the court shall on proof of the
protest, presume the fact of dishonour, unless
and until such fact is disproved

10. Overview of Management
PROMISSORY NOTES
Section 4 of the Act defines, “A promissory
note is an instrument in writing (note being a
bank-note or a currency note) containing an
unconditional undertaking, signed by the maker,
to pay a certain sum of money to or to the order
of a certain person, or to the bearer of the
instruments.”
The person who makes the
promissory note and promises to pay is called
the maker. The person to whom the payment is
to be made is called the payee.
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11. Overview of Management
CHARACTERISTICS OF A
PROMISSORY NOTE
• It is an Instrument in Writing
• It is a Promise to Pay
• Signed by the Maker
• Other Formalities
• Definite and Unconditional Promise
• Promise to Pay Money Only
• Maker must be a Certain Person
• Payee must be Certain
• Sum Payable must be Certain
• It may be Payable on Demand or After a Definite Period
of Time
• It cannot be Made Payable to Bearer on Demand
11

12. Overview of Management
PARTIES TO A PROMISSORY NOTE
• Maker: He is the person who promises to pay
the amount stated in the note. He is the debtor.
• Payee: He is the person to whom the amount is
payable i.e. the creditor.
• Holder: He is the payee or the person to whom
the note might have been indorsed.
12

13. Overview of Management
SPECIMEN OF PROMISSORY
NOTE
Rs. 10,000
Lucknow
April 10, 2013
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the sum of Rupees Ten
Thousand, for value received.
To,
Shri Ramesh,
B-20, Green Park,
Mumbai.
(Maker)
Stamp
Sd/-
Ram
13

14. Overview of Management
Types of Promissory Note
• Promissory notes payable on demand;
• Promissory notes payable after date;
• Joint promissory notes
• Joint and several promissory notes

15. Overview of Management
BILL OF EXCHANGE
According to Section 5 of the act, A bill of
exchange is “an instrument in writing containing an
unconditional order signed by the maker, directing
a certain person to pay a certain sum of money
only to, or to the order of, a certain person or to the
bearer of the instrument”. It is also called a Draft.
Special Benefits of Bill of Exchange:
• A bill of exchange is a double secured
instrument.
• In case of immediate requirement, a Bill may be
discounted with a bank.
15

16. Overview of Management
Parties to Bill of Exchange
• Drawer: The maker of a bill of exchange is
called the ‘drawer’.
• Drawee: The person directed to pay the money
by the drawer is called the ‘drawee’,
• Acceptor: After a drawee of a bill has signed his
assent upon the bill, or if there are more parts
than one, upon one of such pares and delivered
the same, or given notice of such signing to the
holder or to some person on his behalf, he is
called the ‘ acceptor’.

17. Overview of Management
• Payee: The person named in the instrument,
to whom or to whose order the money is
directed to be paid by the instrument is called
the ‘payee’.
• Indorser: When the holder transfers or
indorses the instrument to anyone else, the
holder becomes the ‘indorser’.
• Indorsee: The person to whom the bill is
indorsed is called an ‘indorsee’.
• Holder: A person who is legally entitled to the
possession of the negotiable instrument in his
own name and to receive the amount thereof,
is called a ‘holder’.

18. Overview of Management
• Drawee in case of need: When in the bill or
in any endorsement, the name of any person
is given, in addition to the drawee, to be
resorted to in case of need, such a person is
called ‘drawee in case of need’.
• Acceptor for honour: In case the original
drawee refuses to accept the bill or to furnish
better security when demanded by the notary,
any person who is not liable on the bill, may
accept it with the consent of the holder, for the
honour of any party liable on the bill. Such an
acceptor is called ‘acceptor for honour

19. Overview of Management
ESSENTIAL ELEMENTS OF BILL
OF EXCHANGE
• It must be in Writing.
• Order to pay
• Drawee
• Signature of the Drawer
• Unconditional Order
• Parties
• Certainty of Amount
• Payment in Kind is not Valid
• Stamping
• Cannot be made Payable to Bearer on
Demand
19

20. Overview of Management
SPECIMEN OF BILL OF EXCHANGE
Rs. 10,000
Mumbai
April 10, 2013
Three months after date pay to Ram (Payee) order the sum of Ten Thousand Rupees, for value received.
To,
Sushil
B-20, Green Park,
Lucknow - 226020.
Stamp
Sd/- Ram
In case of need with
Canara Bank, Delhi.
(Drawer)
(Drawer)
Accepted
Sushil
20

21. Overview of Management
CLASSIFICATION OF BILL OF
EXCHANGE
• Inland and Foreign Bills [Section 11 and 12]
– Inland Bill:
• It is drawn in India on a person residing in
India whether payable in or outside India; or
• It is drawn in India on a person residing
outside India but payable in India.
– Foreign Bill:
• A bill drawn in India on a person residing
outside India and made payable outside
India.
• Drawn upon a person who is the resident of
a foreign country.
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22. Overview of Management
CLASSIFICATION OF BILL OF
EXCHANGE (Cont.…)
• Time and Demand Bills:
– Time Bill: A bill payable after a fixed time is
termed as a time bill. A bill payable “after date” is
a time bill.
– Demand Bill: A bill payable at sight or on demand
is termed as a demand bill.
• Trade and Accommodation Bills:
– Trade Bill: A bill drawn and accepted for a
genuine trade transaction is termed as “trade bill”.
– Accommodation Bill: A bill drawn and accepted
not for a genuine trade transaction but only to
provide financial help to some party is termed as
an “accommodation bill”.
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23. Overview of Management
CHEQUE
A “cheque is a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand and it
includes the electronic image of a truncated
cheque and a cheque in the electronic form.
– It is always drawn on a specified banker.
– It is always payable on demand.
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24. Overview of Management
Parties to a Cheque
• Drawer: He is the person who draws the
cheque, i.e., the depositor of money in the bank.
• Drawee: It is the drawer’s banker on whom the
cheque has been drawn.
• Payee: He is the person who is entitled to
receive the payment of the cheque.
• The holder, indorser and indorsee (the same as
in the case of a bill or note).

25. Overview of Management
ESSENTIAL ELEMENTS OF A
CHEQUE
• In writing
• Express Order to Pay
• Definite and Unconditional Order
• Signed by the Drawer
• Order to Pay Certain Sum
• Order to Pay Money Only
• Certain Three Parties
• Drawn upon a Specified Banker
• Payable on Demand
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26. Overview of Management
SPECIMEN OF CHEQUE
Pay ……………………………………………………………………………………………………………......
……………………………………………………………………………………………………. Or Bearer
Rupees ……………………………………………………………………………………………………………
……………………………………………………………………………………………
Kapoorthala Bagh,
Mumbai – 400033
IFSCode:MAHB0000316
A/c No.
“ΙΙ473792ΙΙ” 000240000 000000 10
SHANKAR GAJARE
Signature
Please sign above
26
D D M M Y Y Y Y

27. Overview of Management
TYPES OF A CHEQUE
• Bearer Cheque
• Cross Cheque
• Cheque Crossed Specially
• Restrictive Crossing (A/c Payee Only)
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28. Overview of Management
Difference between bill of
exchange and promissory note

29. Overview of Management
Difference between Cheque and
bill of exchange

30. Overview of Management
NEGOTIATION
According to section 14 of the Act, ‘when a
promissory note, bill of exchange or cheque is
transferred to any person so as to constitute that
person the holder thereof, the instrument is said to be
negotiated.’ The main purpose and essence of
negotiation is to make the transferee of a promissory
note, a bill of exchange or a cheque the holder there
of.
Negotiation thus requires two conditions to be fulfilled,
namely:
• There must be a transfer of the instrument to
another person; and
• The transfer must be made in such a manner as to
constitute the transferee the holder of the
instrument.
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31. Overview of Management
MODES OF NEGOTIATION
Mode of
Negotiation
Negotiation by
delivery(sec.47)
Negotiation by
endorsement and
deleviry(sec 48)
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32. Overview of Management
• Negotiation by delivery (Sec. 47): Where a
promissory note or a bill of exchange or a cheque is
payable to a bearer, it may be negotiated by delivery
thereof. Example: A the holder of a negotiable
instrument payable to bearer, delivers it to B’s agent to
keep it for B. The instrument has been negotiated.
• Negotiation by endorsement and delivery (Sec. 48):
A promissory note, a cheque or a bill of exchange
payable to order can be negotiated only be
endorsement and delivery. Unless the holder signs his
endorsement on the instrument and delivers it, the
transferee does not become a holder. If there are more
payees than one, all must endorse it.
Explanation

33. Overview of Management
Assignment
When a holder of a bill note or cheque
transfer the same to another, he in fact
gives his right to receive the payment of
the instrument to the transferee.

34. Overview of Management
Difference between
Assignment & Negotiation
• Mode of transfer- The transfer by negotiation
requires only delivery with or without
endorsement of a bearer or order instrument.
Whereas the transfer by assignment requires a
separate written document such as transfer
deed signed by the transferor.
• Notice of transfer-Not require in negotiation
• Consideration-consideration must be proved in
assignee.
• Title-
• Right to sue

35. Overview of Management
ENDORSEMENT [SECTION 15]
The word ‘endorsement’ in its literal sense means, writing
on the back of an instrument. But under the Negotiable
Instruments Act it means, the writing of one’s name on the
back of the instrument or any paper attached to it with the
intention of transferring the rights therein. Thus,
endorsement is signing a negotiable instrument for the
purpose of negotiation. The person who effects an
endorsement is called an ‘endorser’, and the person to
whom negotiable instrument is transferred by endorsement
is called the ‘endorsee’.
Who may Endorse / Negotiate [Section 51]:
Every Sole maker, drawer, payee or
endorsee, or all of several joint makers, drawers, payees or
endorsees of a negotiable instrument may endorse and
negotiate the same if the negotiability of such instrument
has not been restricted or excluded as mentioned in
Section 50.
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36. Overview of Management
Essentials of a Valid Endorsement
• It must be on the back or face of instrument or
on a slip of paper annexed thereto.
• It must be signed by the endorser.
• It must be completed by the delivery of the
instrument.
• It must be made by the holder of the
instrument.
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37. Overview of Management
Kinds of Endorsements
ENDORSEMENT
ENSORSEMENT
IN BILLS
ENDORSEMENT
IN FULL
RESTRICTIVE
ENDORSEMENT
CONDITIONAL
ENDORSEMENT
ENDORSEMENT
PARTIAL

38. Overview of Management
EXPLANATION
1. Blank or general endorsement : If the
endorser signs his name only and does not
specify the name of the endorsee, the
endorsement is said to be in blank Sec.The
effect of a blank endorsement is to convert the
order instrument into bearer instrument.
2. Endorsement in full : if the endorser, in
addition to his signature, also adds a direction
to pay the amount mentioned in the instrument
to, or to the order of, as specified person the
endorsement is said to be in full or special
endorsement.

39. Overview of Management
3. Partial Endorsement: partial endorsement which
transfers the rights to receive only a part payment of
the amount due on the instrument is invalid. Such
an endorsement has been declared invalid because
it would subject the prior parties to plurality of
actions and will thus cause inconvenience to them.
4. Restrictive endorsement: An endorsement which,
by express words, prohibits the endorsee from
further negotiating the instrument or restricts the
endorsee to deal with his instrument as directed by
the endorser is called ‘restrictive’ endorsement.
5. Conditional endorsement : If the endorser of a
negotiable instrument, by express words in the
endorsement, makes his liability, dependent on the
happening of a specified event, although such event
may never happen, such endorsement is called a
‘conditional’ endorsement.

40. Overview of Management
SEC- 7 Holder
• Holder means any person entitled in his
own name to the possession a promissory
note bill of exchange or cheque and to
recover or receive the amount due thereon
from the parties thereon. A holder must
therefore have the possession of the
instrument and also the right to recover
the money in his own name.

41. Overview of Management
Holder in due course
Holder in due course means any person who for
consideration became the possessor of a promissory
note, billl of exchange or cheque, if payble to the
bearer or the payee or indrosee there of ,if payble to
the order before the amount mentioned in it became
payble , and without having sufficient cause to believe
that any defect existed in the title of the person from
who he derived his title’
The essential qualification of a holder in due course
• He must be a holder for valuable consideration.
• He must have become a holder (possessor) before
the date of maturity of the negotiable instrument.
• He must have become holder of the negotiable
instrument in good faith.

42. Overview of Management
Section 9 of the Act defines 'holder
in due course' as any person who
• for valuable consideration,
• becomes the possessor of a negotiable
instrument payable to bearer or the indorsee or
payee thereof,
• before the amount mentioned in the document
becomes payable, and
• without having sufficient cause to believe that
any defect existed in the title of the person from
whom he derives his title.

43. Overview of Management
Privileges of a holder in due course
• Instrument purged of all defects
• Rights not affected in case of an inchoate
instrument
• All prior parties liable
• Can enforce payment of a fictitious bill
• No effect of conditional delivery
• No effect of absence of consideration or presence of
an unlawful consideration
• Estoppel against denying original validity of
instrument
• Estoppel against denying capacity of the payee to
indorsee
• Estoppel against indorser to deny capacity of parties

44. Overview of Management
Difference between holder
and holder in due course
• Meaning: Holder means any person entitled in his own
name to the possession of the negotiable instrument and
to recover or receive the amount due thereon from the
parties thereto. A holder in due course on the other
hand, means a holder who takes the instrument in good
faith for consideration before it is overdue and without
any notice of defect in the title of the person who
transferred it to him.
• Consideration: A person who claims to be a holder in
due course must show that he acquired the instrument
for consideration. However consideration may not pass
from a holder of the instrument.

45. Overview of Management
• Title: Holder of negotiable instrument does not acquire a
better title than that of the person from whom he
acquired the instrument. Thus a holder does not acquire
a good title if the title of any of the prior parties is
defective. But a holder in due course gets a good title
even though there was a defect in the title of any prior
parties to the instrument.
• Liability:A holder in due course can sue all prior parties
to a negotiable instrument until the instrument is duly
satisfied. Whereas a holder of the instrument can
enforce it against the person who has signed it and also
against the transfer-or from whom he obtained it.
• Maturity:A person will be a holder in due course only if
he acquires the instrument before the amount mentioned
in it become payable. But a holder may acquire the
instrument even after it has become due for payment.

46. Overview of Management
Section 10 – Payment in
Due Course
• “Payment in due course” means payment in
accordance with the apparent tenor of the
instrument in good faith and without negligence
to any person in possession thereof under
circumstances which do not afford reasonable
ground for believing that he is not entitled to
receive payment of the amount mentioned
therein.

47. Overview of Management
PRSENTMENT
Presentment means showing the instrument to the
drawee, acceptor or maker for acceptance.
TYPES
FOR ACCEPTANCE FOR SIGHT FOR PAYMENT

48. Overview of Management
EXPLANATION
Presentment For acceptance : Application only
for the bill of exchange but in case of payable on
demand or payable On fixed time need not to be
presented for acceptance.
Presentment for sights : in the case of bill
payable after sight means that payment is not to
be demanded till it has been shown to the maker
presentment for payment : this must be
presented before drawee , maker and acceptor.

49. Overview of Management
DISCHARGE OF PARTIES
Parties can be discharge from liability threw various
ways.
• By payment
• By cancellation
• By release
• By taking qualified acceptance
• By non presentment for acceptance of a bill
• By non presentment for acceptance of a bill

50. Overview of Management
EXPLANATION
1. By payment: When the maker acceptor or
indorser makes payment on an instrument in due
course to the person entitled to receive payment
in accordance with the apparent tenor of the
instrument in good faith and without negligence
discharges the parties to the instrument.
2. By cancellation: when the holder or his agent
cancels or strikes out the name of the acceptor or
indorser with intention to discharge him, such
party is discharged from liability to the holder and
to all subsequent parties.
3. By release: Where the holder discharges or
release the maker, acceptor or indorser such
party receiving notice of discharge is discharged
to the holder and to all subsequent parties.

51. Overview of Management
4. By taking qualified acceptance :
If the holder of the bill agree to a qualified
acceptance all prior parties whose consent is not
obtained to such an acception are discharged
from liability.
5. By non presentment for acceptance of a bill :
when bill of exchange is payable certain after the
sight its holder must present it for acceptance to
the drawee with in a reasonable time.
6. A delay in presenting cheque :
it is the duty of the holder of the cheque to
present it for payment within reasonable

52. Overview of Management
Dishonor
• It may be by non acceptance or non payment
• A bill of exchange can be dishonored by non
acceptance in the following ways-
• 1-Does not accept 48 hours from the time of
presentment
• 2-drawee is fictitious person
• 3-Drawee has become insolvent or dead
• 4-Drawee is incompetent

53. Overview of Management
DISHONOUR OF NEGOTIABLE
INSTRUMENT ACT
It may be by non acceptance or non payment of
instrument.
Notice of dishonor is mandatory
Noting of dishonor is also necessary
WAY OF DISHONOUR
NON ACCEPTANCE(SEC 91) NON PAYMENT(SEC 92)

54. Overview of Management
Noting
• Noting is a minute recorded by a notary
public on the dishonoured instrument or on
a paper attached to such instrument.
When a bill is to be noted, the bill is taken
to a notary public who represents it for
acceptance or payment as the case may
be and if the drawee or acceptor still
refuses to accept or pay the bill, the bill is
noted

55. Overview of Management
Noting should specify in the
instrument,
• the fact of dishonour,
• the date of dishonour,
• the reason for such dishonour, if any
• the notary’s charges,
• a reference to the notary’s register and
• the notary’s initials.

56. Overview of Management
Protest
Protest
It is a formal certificate of the notary public
attesting the dishonour of the bill by non-
acceptance or by non-payment. After
noting, the next step for notary is to draw a
certificate of protest, which is a formal
declaration on the bill or a copy thereof.
The chief advantage of protest is that the
court on proof of the protest shall presume
the fact of dishonour.

57. Overview of Management
LIBILITITY OF BANKERS
• Liability of the banker differs based on the nature of
the job performed by the banker.
• The paying banker shall honour only those cheques
that are presented against the accounts maintained
at the specific branch within reasonable time within
banking hours.
• It is the duty of the paying banker to examine the
contents of the cheque before honouring it.
• The liability of the collecting banker is to act in good
faith and without negligence and collect the amount
from the paying banker and credit the same to the
payee’s account.

58. Overview of Management
HUNDIS
A "Hundi" is a negotiable instrument written in an
oriental language. The term hundi includes all
indigenous negotiable instrument whether they
be in the form of notes or bills.
The word 'hundi' is said to be derived from the
Sanskrit word 'hundi', which means "to collect".
They are quite popular among the Indian
merchants from very old days. They are used to
finance trade and commerce and provide a
fascile and sound medium of currency and
credit.

59. Overview of Management
Types of Hundi
1. Darshani Hundi
2. Muddati or Miadi Hundi
3. Shahjog Hundi
4. Nam Jog Hundi
5. Firman Jog Hundi
6. Dhani Jog or Dekhanhar Hundi
7. Jawabee Hundi
8. Jokhmi Hundi